How Nine kept the cricket

It was almost dawn on Monday before
Nine Entertainment Co
executives and UBS bankers, huddled at the TV network’s Sydney headquarters in Willoughby, managed to finalise the paperwork to secure the media rights to cricket. It was the culmination of a frantic fortnight of multiple negotiations.

Nine chief executive
David Gyngell
later told his staff that it had “been a long and sometimes difficult and complex process". It was an understatement.

Nine’s $450 million deal with Cricket Australia and associated deals with WIN to acquire its Adelaide station for about $140 million and renew its affiliation agreements sit within a broader matrix of deals also involving its commercial TV rival
Ten Network
, which has won the rights to cricket’s Twenty20 Big Bash League.

Nine boss David Gyngell says “Cricket is in our DNA”, but with US hedge funds eyeing an ASX listing for Nine by mid-net year, going to market without the broadcaster’s traditional summer schedule of cricket would have been a difficult sell.
AFR

Somehow, the planets seemed to align so three commercial TV broadcasters – who are often at each other’s throats – could actually negotiate and each walk away with something that would leave them better off.

Nine’s discussions with WIN began last December, but were limited to renewing program supply deals. Nine was facing a protracted $3 billion recapitalisation – which was finally completed in early 2013 – and was at its weakest point in corporate terms. At the same time it was locked in exclusive talks with Cricket Australia, albeit in the knowledge the sport’s organising body would put the contract out to tender come January 1.

WIN’s long-term regional affiliation deal, as well as its Perth agreement, to take programming from Nine had both expired in June 2012 and were extended to December. The parties agreed to roll over the deals in order to give Nine room to restructure.

Around the same time Nine had entered into talks with
Southern Cross Media
about a possible regional affiliation deal or a merger. Southern Cross’s decade-old regional deal with Ten expires at the end of this month. Ten’s low-rating programs have hurt Southern Cross’ TV advertising revenues over the past two years.

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Once news leaked in February about the Nine-Southern Cross talks, WIN’s owner, Bermuda-based Gordon, was incensed. Nine and WIN talks stepped up to another level and also canvassed a possible merger.

Reach rule kills merger talks

However, the topic was academic, as the merger between metropolitan networks and regional broadcasters cannot happen under the reach rule, which prevents a TV licence owner from reaching more than 75 per cent of the national population. The government’s botched attempt to scrap the reach rule in March, among a host of other media reforms, now makes it likely the rule will be around for the medium term at least.

Nine’s recapitalisation left it with about $700 million in new debt plus new owners, the US-based hedge funds Oaktree Capital and Apollo Global Management. But once the company was given a second life, Gyngell and his executive team turned their attention to retaining the media rights for international games over the next five years, starting 2013-14.

Given Nine had broadcast the sport for 36 years, and that it was inextricably associated with the network’s former owner, the late
Kerry Packer
, cricket was more than just another live event broadcast. “Cricket is in our DNA. We are very proud of it," Gyngell says.

Moreover, the US hedge funds want to list Nine on the ASX by mid-next year. Going to market without Nine’s traditional summer schedule of cricket would be a difficult sell.

Although Nine had last rights to the new cricket deal, in which it only had to match the highest bid, the outcome of the bidding process was far from certain.

In January 2012, Cricket Australia’s (CA) general manager, media rights,
Stephanie Beltrame
formed a team to handle the rights negotiations, working in concert with general counsel
Dean Kino
. An advisory panel led by Deutsche Bank vice chairman
Steven Skala
was integral to the team, as was CA chief executive
James Sutherland
.

Against the trend for sport, the team was determined to gain free-to-air coverage for all forms of cricket, including the fledgling Big Bash League, then in the midst of a revamp and popular first season.

A thorough investigation

The rights team conducted a thorough investigation of the balance sheets and strategies of all three free-to-air networks and Fox Sports Australia, which was paying about $12 million a year for the Big Bash and other domestic games (Nine was paying $45 million for all international matches) and by the end of 2012 had held dozens of meetings with all the networks.

Early this year, CA’s pace accelerated. A 50-page tender document outlining exactly what it wanted was sent in February to all interested parties. After a “beauty parade", Credit Suisse, among others, was drafted in to assist CA.

Seven West Media
lodged a large indicative bid, while Nine hung back. Fox Sports bid for the Big Bash while
Telstra
put in for the digital rights.

The wild card was Ten. Almost three months ago, chairman
Lachlan Murdoch
flew from Sydney to Melbourne to meet with Sutherland to talk about the cricket.

Ten was at its lowest ebb. Last year’s ratings had slumped miserably, along with its advertising revenues. In February, the board summarily sacked chief executive James Warburton after barely a year in the job and the third-rating commercial network looked directionless.

However, Ten’s new CEO,
Hamish McLennan,
had known Sutherland personally for over a decade, in McLennan’s previous life as an advertising executive. “They always got on well," says a close source.

Time to roll the dice

McLennan knew Ten had to roll the dice. Live sport – especially a national sport like cricket – virtually guarantees large audiences. But Ten was reluctant to bid for the cricket if there was no obvious outcome. Once CA had informed the networks that the Big Bash – in its view – fell outside Nine’s last rights, Ten felt there was a reasonable chance it could get some cricket. Legal action threatened by CA late in the process against Nine was seen as a preventative measure and ultimately was not a hurdle to a final deal being struck.

The Ten board, which includes mining billionaire
Gina Rinehart
and fast-food king
Jack Cowin
, gave the go-ahead in March. It is understood Ten management decided to bid a price high enough to stretch Nine – and leave it with less money to spend on other programming – but not so high that Ten could not afford to pay it. McLennan consulted with chief financial officer
Paul Anderson
and chief operating officer
Jon Marquard
, keeping Murdoch informed.

A month ago, Ten lodged a bid of $550 million for all cricket – about twice as much as CA had previously received. It stunned everyone, especially Nine. Ten would lose about $40 million a year at that price.

Beltrame and Kino flew to Sydney and presented Gyngell with a 100-page document detailing Ten’s bid. “It was fair to say Nine was surprised," says a source who adds the document showed CA was serious about going with Ten.

Financial solutions needed, and fast

A week later, in mid-May, Gyngell flew to Los Angeles to meet with the hedge funds and attend a board meeting in the Californian megalopolis. Apollo and Oaktree said they thought the cricket rights would be too expensive, but added they were open to management presenting a viable business case. Gyngell needed a financing solution, fast. Nine’s deadline to respond, Monday June 3, was looming.

Together with Nine managing director
Jeff Browne
and UBS bankers led by managing director
Michael Stock
, they came up with an ingenious solution.

Nine went back to WIN with two new propositions. They asked Gordon to increase WIN’s fees for its regional affiliation deal from 33 per cent of TV ad revenues to 36 per cent plus additional content charges, which raised the effective fee to 39 per cent. Also, Nine offered to buy WIN’s Adelaide station for about $140 million – at about a nine times earnings multiple – with an option to buy its Perth station if the reach rule is abolished. It’s understood the price for the Perth station would be on a similar multiple, implying more than $200 million.

The higher affiliate fees to Nine plus revenue and cost-saving synergies from the Adelaide station of at least $6 million a year would help fund the higher cricket rights price.

It is believed Nine calculated its incremental increased net cost for the cricket rights would be about $7 million a year. Gyngell confirmed Nine intends to raise more debt to buy the Adelaide station.

Gordon was no pushover, and the talks dragged on until last Sunday. Advised by KPMG Corporate Finance, and assisted by WIN chief executive
Andrew Lancaster
and chief financial officer
Daniel Collis
, he finally agreed to Nine’s proposals. The aging patriarch of the unlisted WIN was keen to take the opportunity to realise some cash, pay down debt, and clean up WIN’s asset portfolio, say sources.